November 18th, 2016 Company: Action: Price Target: Students:

Transcription

1 November 18 th, 2016 Company: Casey s General Stores, Inc. (NASDAQ: CASY) Action: Long Price Target: $145 Students: Yamel Cotero, Jonathan Evans, Ian Ricks

2 Long: CASY Company Overview Casey s is the 5 th Largest Pizza Chain in the US Highlights Casey s General Stores, is a chain of gas and convenience stores in the Midwestern United States Headquartered in Ankeny, IA 1933 stores operated as of Q in 14 states o 99% of stores are owned o Iowa, Missouri, Illinois are its core markets o All but two stores sell gas Integrated supply chain for food, fuel, and grocery In house construction and transportation services 5th largest pizza chain in the US Accretive acquisition of small independent gas/convenience store chains highly likely Organic growth through new store development in Midwest and plains Market Value 2016 Financial Data Current Valuation Stock Price $ Shares Outstanding 39.1 Market Capitalization 4,563.8 Plus: Debt Less: Cash Enterprise Value 5,246.7 Revenue $ 7,122.1 EPS $ 5.73 Gross Margin 22.7% EBITDA Margin 7.9% Net Margin 3.2% (Consensus) P/E P/E EV/ EBITDA EV/ EBITDA (In US$ MM) Price Target FY 2017 Price Target $ Estimated Upside 24.23% Source: Company Filings, Factset and Bloomberg (1) Stock Price as of November 11, 2016

3 Long: CASY Industry Overview Convenience Store Industry is Fragmented Highlights Fragmented Industry Convenience Store Industry is Fragmented o Couche-Tard controls 8% of market o Most majors confined to specific regions Number of Stores 7, , ,273 7,276 Less Than 5.0% of Stores Owned by Major Oil o Industry trend has been to divest retail operations o Transportation costs high in remote regions o Result is a shift towards independent operators Traditional Drivers of Gas & Convenience Stores o Oil prices o Total vehicle miles o Consumer spending o Energy related tax credits 5, , , , , ,770 1,933 1,318 1,309 1, Co Spy Ca CST Sun Mur A K Source: Company Filings, CSP Magazine, IBISWorld

4 Long: CASY Investment Thesis Significant Upside Opportunity 1 2 Unique Business Model with Significant Competitive Advantages Well Positioned for Growth and Industry Consolidation Small markets provide a moat against national convenience store and restaurant chains Internally managed supply chain and development Business can survive economic downturns Accretive acquisition of small independent gas/convenience store chains highly likely Organic growth through new store development in Midwest and plains New distribution center allowing efficient entry into new markets There s a Domino s Pizza Hidden Inside Multiple Levers to Continue Driving High Margin Prepared Foods Casey s is the 5 th largest pizza chain in the U.S. Pizza represents ~50% of sales in Casey s highest margin prepared foods business Casey s is comping better than high growth Domino s Pizza and Papa John s Pizza Store conversions to drive increased prepared food sales Rollout of delivery and app across store base Remodels and replacements Margin Improvement Mix shift to prepared foods Strong operating leverage to drive margin upside ROIC normalization will drive multiple expansion

5 Long: CASY Investment Thesis Thesis #1: Unique Business Model with Significant Competitive Advantages Main Takeaways Business Model Provides Superior Pricing Power and Barriers to Entry o 59% of stores serve populations under 5,000, 82% of stores serve populations under 20,000 o Management claims Casey s can successfully operate in towns with only 400 people o Often the only convenient and reliable option for gas, groceries, and prepared food o Price increases of 2-3% in had no effect on demand 80% 60% 40% 20% 0% Gross Margin by Segment 63% 32% 9% Fuel Grocery Prepared Food % Gross Profit % Total Revenue Integrated Wholesale, Transportation and Construction Provides Operating Leverage % Revenue % Gross Profit o Two owned distribution centers provide over 3,000 products to Casey s stores o No long-term supply contracts with suppliers allows for flexibility o In house construction team manages new store builds and renovations Fuel Grocery Prepared Food 12% 28% 59% Fuel Grocery Prepared Food 34% 24% 39% Source: Company Filings

6 Long: CASY Investment Thesis Thesis Thesis #2: Well Positioned for Growth and Industry Consolidation Main Takeaways Since 2011, number of stores increased 18% o Net income has increased 139% o Historical net store increases have averaged 3.5% primarily from new development o New store growth guided to be 4-6% per year organic, augmented by acquisitions o HSD Comps at incremental margins drive investment rationale 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 Continued Growth of Store Base E 2018E 2019E 2020E Significant Runway for Continued Growth in Existing Territory

7 Long: CASY Investment Thesis Thesis Thesis #2: Well Positioned for Growth and Industry Consolidation New Distribution Center to Expand Acquisition Opportunities Distribution Center Terre Haute Indiana Terre Haute, IN Distribution Center Facilitates Expansion to the South/East o Second distribution center serves 600 stores and has eliminated most 2-day trucking routes o First store in Ohio expected to open in January 2015 Company is Actively Looking for Acquisitions o Casey s non-core rural markets characterized by smaller chains with limited scale o Current Net Debt/EBITDA is 1.1x o Southeastern states have highest percentage of rural areas in the country o Highest tobacco use prevalence o High miles driven per licensed driver Significant Acquisition Synergies o Historical Casey s acquisitions purchased at 5-7x EV/EBITDA o Historical acquisitions have seen 2-9% improvements in grocery margins due to distribution synergies o Acquisition strategy involves adding SF for prepared foods

8 Long: CASY Investment Thesis Thesis #3: There s a Domino s Hidden Inside Main Takeaways Casey s is the 5 th largest pizza chain in the US Casey s is the 5 th largest pizza chain in the US o In 2015, CASY sold 19 million pizzas and 62 million slices o Pizza represents ~50% of CASY s Prepared Foods o o Pizza is made fresh in each CASY location Since January, the company now offers online ordering in all of its stores Pizza Chains in the US Comping better than high growth DPZ and PZZA Restaurant Name # Stores Pizza Hut 15,605 Domino s 11,629 Papa John s International 4,708 Little Caesars Pizza 4,059 Casey's 1,933 Papa Murphy s International 1,425 Sbarro 820 Marco s Pizza 640 Chuck E. Cheese s 577 CiCi s Pizza 519 California Pizza Kitchen % 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% CASY DPZ PZZA

9 Long: CASY Investment Thesis Thesis #4: Multiple Levers to Drive High Margin Prepared Foods Initiative Incremental Sales Progress 1) Stores Offering Pizza Delivery 30%-40% in pizza 20%-30% in prepared foods Adding 100 stores over NTM 75% of stores yet to offer delivery 2) Online Ordering and Mobile App 13% higher basket than phone order Promotions convert outside sales inside 3) Extended Store Hours 20%-30% increase in prepared food sales for 24 hour locations 533k downloads YTD Only half of stores currently converted 4) Acceleration of Store Remodels/Replacements 5%-15% increase in grocery revenue 25%-35% increase in prepared foods 80% of stores yet to be remodeled ~7% to be remodeled/replaced in NTM

10 Long: CASY Investment Thesis Thesis #5: Margin Improvement Main Takeaways EBITDA Margins poised to grind higher CASY sales mix is shifting towards its higher margin prepared food and grocery business Declining gas margins offset by improving mix We forecast operating margins to remain high and improve overtime 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% ecommerce and Int l Growth to drive margin expansion % of % of Sales Gross E Growth Margin Gross Gross Rate Range Profit Profit Improved Cost Absorption of New IN Distribution Center Fuel 24% MSD 17% 6-9% Grocery 39% 9%-11% 40% 30%-32% Prepared Food 34% 11%-17% 40% 60%-63% Other 3% 5% 3% 15%-25%

11 Long: CASY Investment Risks Investment Risks Risks Weak Farm Economy Reduces Inside Sales Secular Decline in Tobacco and Fuel Sales RINs price declines lower fuel margins Mitigation Flexibility of wholesale and distribution model allows versatility in product offerings Above market fuel comps combined with promotions convert fuel sales to inside sales Gross profit has increased every year since 1997 Casey s operates in states with the highest tobacco use per capita in the US Tobacco is a smaller component of grocery gross profit vs. peers not driving comps Existing and new markets among highest miles driven Casey s has historically used incremental RINs margin to keep prices low and take market share Historical price increases demonstrate significant pricing power in many store locations Historical Gross Profit Source: Company Filings, American Cancer Society

12 Long: CASY Recent Update CASY has missed two consecutive quarters And 2018E EPS estimates have fallen due to transitory headwinds % decrease CASY also recently filed an 8-K that revealed weak October quarter Grocery comps Source: Company Filings, FactSet

13 Long: CASY Stock Price History Casey s has declined 14% from its all-time high of $ in July Casey's General Stores, Inc. Monthly % 4:00:00 PM VWAP: High: Low: Chg: % Casey's General Stores, Inc. - Price Cvol: 337,655 Avg: 8,385,611 Casey's General Stores, Inc. - Volume '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 0 Source: FactSet

14 Long: CASY Differentiation 2017E EPS 2018E EPS 2017E EBITDA 2018E EBITDA Consensus View $5.59 $6.35 $575mm $642mm Our View $5.79 $6.97 $587mm $687mm 3.6% 9.7% 2.0% 7.0% Consensus View Variant Perception Soft comps in grocery and prepared foods continue through 2018 July 4 th weather was a significant factor in 1Q16 grocery slowdown Converted stores accelerate inside sales comps to HSD in 2H17 and 2018 Gross margin will contract as fuel prices recover and margins revert Gas prices unlikely to rebound quickly Margins can remain at CPG in near term Sales mix shift mitigates fuel risks over time Operating expenses increase 10+% per year due to wage growth and new store initiatives Online/App ordering introduce some operating leverage Second distribution center improves operating efficiencies as store count grows Source: Company Filings, FactSet

15 Long: CASY Valuation 1-Year Price Target: $145 Downside Case: $93 Upside Case: $166 FY2018E (April 2018) Scenarios FY2016 FY2017E Bear Base Bull Revenue $7,122.1 $7,700.7 $8,009 $8,604 $8,856 Y/Y Growth -8.3% 8.1% 4.0% 11.7% 15.0% EBIT $390.5 $393.4 $416 $465.1 $514 Margin 5.5% 5.1% 5.2% 5.4% 5.8% EPS $5.73 $5.79 $6.17 $6.97 $7.77 P/E Multiple 15.0x 20.8x 21.4x EBITDA $561.4 $586.6 $638.6 $687.2 $735.8 Margin 7.9% 7.6% 8.0% 8.0% 8.3% EV/EBITDA 7.0x 9.5x 10.0x Per Share Value $92.86 $ $ Upside/Downside % 24% 42% Bear Case: $93 Target Grocery sales come under pressure and Prepared Foods comps decelerate pressuring margins Base Case: $145 Target Re-acceleration of Inside Sales comps, flat gross margins, stable gas prices and minor Fuel margin compression Bull Case: $166 Target Re-acceleration of Inside Sales comps, gross margin expansion, stable or decrease in average gas price and stable Fuel margins 20% Downside 24% Upside 42% Upside Source: Company Filings, FactSet

16 Long: CASY Valuation Sum-of-Parts suggests meaningful value could be realized as Prepared Foods gains recognition Revenue % of Revenue EBITDA % of EBITDA EV/EBITDA Value /Share Fuel/Grocery % $432 63% 8.5x $3,672 $92.96 Prepared Food % $255 37% 14.0x $3,570 $90.38 Segment Total % $ x $7,242 $ Net Debt $698 $17.67 CASY Equity $ x $6,544 $ E EPS $6.97 P/E 23.8x US ($mm) P/E EV/EBITDA P/CF EBITDA Margin ROIC Ticker Company Market Cap EV FY1 FY2 FY1 FY2 TTM TTM TTM ATD.B-CA Alimentation Couche-Tard 35,989 38, % 27.2 CST CST Brands 3,642 5, % 7.0 MUSA Murphy USA 2,350 2, % 10.4 Average % 14.9 DPZ Domino's Pizza 7,674 9, % 56.3 PZZA Papa John's Pizza 3,108 3, % 25.6 Average % 40.9 CASY Casey's General Stores 4,573 5, % 12.9 Source: Company Filings, FactSet

17 Long: CASY Valuation CASY FY2 P/E CASY Price/Cash Flow Casey's General Stores, Inc. Casey's General Stores, Inc. - PE - FY2 Monthly High: Low: Avg: Casey's General Stores, Inc. Casey's General Stores, Inc. - PCF - LTM Monthly High: Low: 5.22 Avg: '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 10 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 4 CASY FY2 EV/EBITDA CASY Relative FY2 EV/EBITDA Casey's General Stores, Inc. Casey's General Stores, Inc. - EV/EBITDA - FY2 Monthly High: 9.44 Low: 4.48 Avg: Casey's General Stores, Inc. Casey's General Stores, Inc. - EV/EBITDA - FY2 Relative to S&P 500 Monthly High: 1.18 Low: 0.63 Avg: '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 4 '07 '08 '09 '10 '11 '12 '13 '14 '15 ' Source: Company Filings, FactSet

18 Long: CASY Appendix

19 Long: CASY Income Statement CASY Income Statement Fiscal Year Ends April E 2018E 2019E 2020E 2021E ($ in Millions, except EPS) Revenues $5,635.2 $6,987.8 $7,250.8 $7,840.3 $7,767.2 $7,122.1 $7,700.7 $8,603.7 $9,285.5 $9,992.7 $10,750.1 COGS $4,754.2 $5,987.7 $6,179.8 $6,618.2 $6,327.4 $5,508.5 $5,960.3 $6,644.5 $7,137.7 $7,638.9 $8,173.6 Gross Profit $881.1 $1,000.1 $1,071.1 $1,222.0 $1,439.8 $1, , , , , ,576.5 Gross Margin 15.6% 14.3% 14.8% 15.6% 18.5% 22.7% 22.6% 22.8% 23.1% 23.6% 24.0% SG&A $607.3 $688.2 $756.7 $854.8 $958.6 $1,052.2 $1,153.8 $1,272.0 $1,395.6 $1,531.3 $1,680.1 D&A $82.4 $96.6 $111.8 $131.2 $156.1 $170.9 $193.2 $222.1 $246.8 $271.1 $295.4 Operating Income $191.4 $215.4 $202.6 $236.1 $325.0 $390.5 $393.4 $465.1 $505.4 $551.4 $601.0 Operating Margin 3.4% 3.1% 2.8% 3.0% 4.2% 5.5% 5.1% 5.4% 5.4% 5.5% 5.6% Interest and other $40.2 $35.4 $39.0 $42.4 $43.0 $41.8 $41.9 $41.9 $41.9 $41.9 $41.9 Pre-tax Income $151.2 $180.0 $163.6 $193.7 $282.0 $348.7 $351.5 $423.2 $463.5 $509.5 $559.1 Income Tax $56.6 $65.3 $59.8 $66.8 $101.4 $122.7 $123.0 $148.1 $162.2 $178.3 $195.7 Net Income (Recurring) $94.6 $114.7 $103.8 $126.9 $180.6 $226.0 $228.5 $275.1 $301.3 $331.2 $363.4 EPS $2.22 $2.99 $2.69 $3.26 $4.62 $5.73 $5.79 $6.97 $7.63 $8.38 $9.19 Average Fully Diluted Shares DPS $0.48 $0.59 $0.64 $0.70 $0.77 $0.85 $0.96 $1.08 $1.23 $1.38 $1.56 Payout Ratio 21.7% 19.9% 23.8% 21.4% 16.7% 14.8% 16.6% 15.6% 16.1% 16.5% 17.0% EBIT $191.4 $215.4 $202.6 $236.1 $325.0 $390.5 $393.4 $465.1 $505.4 $551.4 $601.0 D&A $82.4 $96.6 $111.8 $131.2 $156.1 $170.9 $193.2 $222.1 $246.8 $271.1 $295.4 EBITDA $273.8 $311.9 $314.4 $367.3 $481.1 $561.4 $586.6 $687.2 $752.2 $822.5 $896.4 Margin 4.9% 4.5% 4.3% 4.7% 6.2% 7.9% 7.6% 8.0% 8.1% 8.2% 8.3% Margin Analysis Gross Margin 15.6% 14.3% 14.8% 15.6% 18.5% 22.7% 22.6% 22.8% 23.1% 23.6% 24.0% SG&A (% of Sales) 10.8% 9.8% 10.4% 10.9% 12.3% 14.8% 15.0% 14.8% 15.0% 15.3% 15.6% Operating Margin 3.4% 3.1% 2.8% 3.0% 4.2% 5.5% 5.1% 5.4% 5.4% 5.5% 5.6% EBITDA Margin 4.9% 4.5% 4.3% 4.7% 6.2% 7.9% 7.6% 8.0% 8.1% 8.2% 8.3% Income Tax Rate 37.4% 36.3% 36.6% 34.5% 36.0% 35.2% 35.0% 35.0% 35.0% 35.0% 35.0% Source: Company Filings

20 Long: CASY Balance Sheet CASY Balance Sheet Fiscal Year Ends April E 2018E 2019E 2020E 2021E ($ in millions, except EPS) ASSETS Cash & cash equivalents Short-term investments Restricted cash Accounts receivable Inventories Other current assets Total current assets PP&E Other assets Total assets LIABILITIES Short-term debt Accounts payable Other current liabilities Total current liabilities Long term debt Other noncurrent liabilities Total liabilities Shareholders' equity Total Liabilities & Shareholders' Equity Source: Company Filings

21 Long: CASY Statement of Cash Flows CASY Statement of Cash Flows Fiscal Year Ends April E 2018E 2019E 2020E 2021E ($ in millions, except EPS) Net Income D&A Other Working capital and other, net: Receivables Inventories Payables Other Operating cash flow Development costs Acq capex Capex Other Investing cash flow Share repurchases Share Issued Dividends paid Debt Issued Debt Repaid Other Financing cash flow Exchange rate effects Change in cash Beginning cash Ending cash Free cash flow FCF/Share $ (1.57) $ 0.38 $ (1.25) $ (0.67) $ (1.54) $ 1.64 $ (0.66) $ 0.83 $ 1.56 $ 2.38 $ 3.23 CFFO/NI 276.4% 257.2% 275.9% 247.8% 189.2% 205.6% 218.4% 203.6% 202.5% 200.6% 198.4% Source: Company Filings

22 Long: CASY DCF Analysis Free cash flow calculation FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY Revenue $7,700.7 $8,603.7 $9,285.5 $9,992.7 $10,750.1 $11,287.6 $11,851.9 $12,444.5 $13,066.8 $13,720.1 Operating Margin 5.1% 5.4% 5.4% 5.5% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% Operating Profit (EBIT) $393.4 $465.1 $505.4 $551.4 $601.0 $631.1 $662.6 $695.7 $730.5 $767.1 Less: Taxes $137.7 $162.8 $176.9 $193.0 $210.4 $220.9 $231.9 $243.5 $255.7 $268.5 Tax Rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% NOPAT $255.7 $302.3 $328.5 $358.4 $390.7 $410.2 $430.7 $452.2 $474.8 $498.6 Less: CapEx ($525.0) ($527.3) ($548.4) ($570.3) ($593.1) ($500.0) ($500.0) ($500.0) ($500.0) ($500.0) Less: Changes in net working capital $17.3 $2.9 $2.0 $2.0 $2.1 $0.0 $0.0 $0.0 $0.0 $0.0 Add: Depreciation & Amortization $193.2 $222.1 $246.8 $271.1 $295.4 $310.1 $325.6 $341.9 $359.0 $ FCFF ($58.8) $0.0 $28.9 $61.2 $95.0 $220.3 $256.3 $294.2 $333.9 $375.6 Terminal Value Calculation Year 6-10 growth rate 5.0% Terminal value growth rate 2.0% Projected FCF $383.1 E/(E+D) 57.1% Discount Rate (WACC) 5.7% Terminal enterprise value $10,336.4 Implied Term. Value EBITDA multiple 9.0x Summary Valuation DCF Enterprise Value $7,060.2 Less: Net Debt ($806.8) Equity Value $6,253.4 Diluted shares 39.4 DCF value per diluted share $ DCF Value Per Share Terminal Growth 4.7% WACC 5.7% 6.7% 1.5% $ $ $ % $ $ $ % $ $ $127.00

23 Long: CASY Revenue Build CASY Revenue Build Fiscal Year Ends April E 2018E 2019E 2020E 2021E ($ in Millions, except EPS) Revenues Retail - Convenience Stores Fuel 3, , , , , , , , , , ,835.3 Grocery & Other Merchandise 1, , , , , , , , , , ,197.6 Prepared Food & Fountain , , , ,650.1 Other Total Revenues 5, , , , , , , , , , ,750.1 Gas Revenue Gallons per Store ,015 1,040 1,061 1,077 1,093 1,110 Avg. Price Per Gallon $ $ 2.87 $ 3.45 $ 3.41 $ 3.33 $ 2.83 $ 2.16 $ 2.16 $ 2.26 $ 2.26 $ 2.26 $ 2.26 Gas Margin RINs Contribution (CPG) Total Gas Margin CPG Margin % 5.30% 4.45% 4.23% 4.83% 6.83% 9.07% 8.68% 8.08% 7.52% 7.52% 7.52% Store Buildout # Stores year end 1,637 1,699 1,749 1,808 1,878 1,931 2,028 2,109 2,193 2,281 2,372 Average Stores 1,668 1,724 1,779 1,843 1,905 1,980 2,069 2,151 2,237 2,327 % store growth 3.8% 2.9% 3.4% 3.9% 2.8% 5.0% 4.0% 4.0% 4.0% 4.0% Same Store Comps by Segment Fuel Gallons -1.5% 0.1% 3.1% 2.6% 3.0% 2.5% 2.0% 1.5% 1.5% 1.5% Grocery & Other Merchandise 6.7% 0.8% 7.4% 7.8% 7.1% 6.2% 6.0% 6.0% 6.0% 6.0% Prepared Food & Fountain 14.3% 8.6% 11.8% 12.4% 8.4% 6.5% 12.0% 10.0% 8.0% 8.0% Total 1.6% 8.7% 3.0% 8.7% 9.2% 7.5% 6.3% 7.9% 7.3% 6.7% 6.7% Implied Existing Store Revenue Fuel Gallons 4, , , , ,720.9 Grocery & Other Merchandise 1, , , , , , , ,096.7 Prepared Food & Fountain , , , ,597.9 Implied New Store Revenue Fuel Gallons Grocery & Other Merchandise Prepared Food & Fountain Gross Margin by Segment Fuel 5.3% 4.4% 4.2% 4.8% 6.8% 9.1% 8.7% 8.1% 7.5% 7.5% 7.5% Grocery & Other Merchandise 32.2% 32.5% 32.6% 32.1% 32.1% 31.9% 31.0% 32.0% 32.5% 32.5% 32.5% Prepared Food & Fountain 62.2% 60.7% 61.8% 61.1% 59.7% 62.5% 62.0% 62.5% 62.5% 62.5% 62.5% Other 99.8% 99.8% 99.9% 99.9% 99.9% 99.9% 100.0% 100.0% 100.0% 100.0% 100.0% Total Gross Profit 15.6% 14.3% 14.8% 15.6% 18.5% 22.7% 22.6% 22.8% 23.1% 23.6% 24.0%

24 Source: Ownership Long: CASY Ownership

25 Long: CASY Management and Incentives Name Title Years in Role Years with CASY Ownership Minimum (X of Base Salary) Robert Myers Chairman % 4x Terry Handley CEO % 3x William Walljasper CFO % 3x Incentive Metrics 1) Diluted EPS (75%) 2) ROIC (25%)